Saturday, February 18, 2012

How can I calculate the percentage cost of a call option?

Option pricing theory is quite complex to be discussed here extensively. I provide two references below, that I got from a simple search in yaoo of "option pricing".


The basic idea behind the pricing models is that the stock price is an uncertain value, which has a lognormal distribution.


The option price is the expected value of the payout function.


That is, you compute, for every possible stock price, the option price, then multiply by its probability, and that's it.

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